Child and Working-Age Poverty from 2010 to 2020

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1 Child and Working-Age Poverty from 2010 to 2020 IFS Commentary C121 Mike Brewer James Browne Robert Joyce

2 Child and working-age poverty from 2010 to 2020 Mike Brewer James Browne Robert Joyce Institute for Fiscal Studies Copy-edited by Judith Payne The Institute for Fiscal Studies 7 Ridgmount Street London WC1E 7AE

3 Published by The Institute for Fiscal Studies 7 Ridgmount Street London WC1E 7AE Tel: +44 (0) Fax: +44 (0) mailbox@ifs.org.uk Website: Printed by Pureprint Group, Uckfield The Institute for Fiscal Studies, October 2011 ISBN:

4 Preface The Joseph Rowntree Foundation has supported this project as part of its programme of research and innovative development projects, which it hopes will be of value to policymakers, practitioners and service users. The facts presented and views expressed in this Commentary are, however, those of the authors and not necessarily those of the Foundation, nor of the other individuals or institutions mentioned here, including the Institute for Fiscal Studies, which has no corporate view. The authors acknowledge the contribution made by Joel Banford, Rafal Chomik, Carl Emmerson, Saranna Fordyce, Chris Goulden, Paul Gregg, Gawain Heckley, Donald Hirsch, Anne MacDonald, Patrick Nolan, Stefania Porcu, Holly Sutherland and Graham Whitham, who provided advice during the project or comments on earlier drafts. We are extremely grateful to Amy Morgan for her advice on how to model Universal Credit. The Family Resources Survey is crown copyright material and is reproduced with the permission of the Controller of HMSO and the Queen s Printer for Scotland. It was obtained from the Economic and Social Data Service at the UK Data Archive. James Browne and Robert Joyce are at the Institute for Fiscal Studies and Professor Mike Brewer is at the Institute for Social and Economic Research at the University of Essex. Correspondence to: james_browne@ifs.org.uk.

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6 Contents Extended summary 1 1. Introduction 5 2. Child poverty: past performance and policy context for the future Child poverty under the Labour government Child poverty over the next decade 8 3. Results The path of poverty to 2013 under current policies The effect of Universal Credit in 2014 and Projections of poverty in 2020 under different scenarios The direct impact on poverty of the coalition government s tax and benefit reforms Sensitivities Conclusion 31 Appendices 33 Appendix A. Details of assumptions and modelling procedures 33 Appendix B. Poverty projections under full take-up and without applying 51 any correction to simulated incomes Appendix C. Poverty projections without the coalition government s tax 53 and benefit reforms Appendix D. Poverty rates using 50% and 70% of median income 55 References 59

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8 Extended summary This Commentary presents forecasts of relative and absolute income poverty in the UK among children and working-age adults for each year between and , and for , using a static microsimulation model augmented with forecasts of key economic and demographic characteristics. It updates and extends previous JRF-funded work by Mike Brewer and Robert Joyce, which forecast poverty through to , and builds on previous ESRCfunded work by Mike Brewer, James Browne and Wenchao Jin, which simulated the impact of Universal Credit on household incomes. This exercise is necessarily subject to uncertainties and limitations. Macroeconomic forecasts such as those we make use of here are always highly uncertain, and this is especially true at present; the data available do not enable us to model all of the tax and benefit changes coming in over the next few years precisely, and we cannot fully account for the impacts of behavioural changes that result from tax and benefit reforms; and the underlying survey data used are, of course, subject to sampling error. However, the results should provide a useful guide to what might happen to poverty under current government policies. Background The Child Poverty Act, passed with all-party support in 2010, commits successive governments to the eradication of child poverty by The Act lists four measures of child poverty, each with their own target which needs to be met for child poverty to be said to be eradicated, but this Commentary concentrates on relative and absolute poverty, as the other measures cannot yet be modelled. The Act defines an individual to be in relative poverty if his or her household s equivalised income is below 60% of the median in that year; and he or she is in absolute poverty if the household s equivalised income is below 60% of the median income, adjusted for inflation. All numbers referred to in this Extended Summary are for poverty with incomes measured before housing costs have been deducted; conclusions are very similar for poverty with incomes measured after housing costs have been deducted. Incomes and poverty under current policies The table on the next page gives the central forecasts of relative and absolute poverty amongst children and working-age adults in every year between and , and in , as well as actual poverty in In the short run, relative child poverty is forecast to remain broadly constant between and , before rising slightly in Relative working-age adult poverty is forecast to rise slightly between and , before rising faster in Absolute child and working-age adult poverty are forecast to rise continuously, and by more than relative poverty, over this period. This unusual pattern arises because the living standards of low-income families are set to fall over the period -- which will increase absolute poverty -- but they are forecast to fall by less than the living standards of families at median income, and so relative poverty is forecast to have fallen in Indeed, at its low point, real median household income is forecast to be 7% lower in than it was in , and to remain below its level until at least This unprecedented collapse in living standards is chiefly due to the (actual or forecast) high inflation and weak earnings growth over this period. As families in poverty get much of their income from state benefits and tax credits, which are typically increased in line with inflation, a fall in real earnings closes the gap between them and families around median income, who get much of their income from earnings. 1

9 Child and working-age poverty from 2010 to 2020 Children Working-age parents Working-age adults without children Millions % Millions % Millions % Relative poverty (actual) (actual) Absolute poverty Notes: Poverty line is 60% of median before-housing-costs (BHC) income. Years refer to financial years. Source: Authors calculations based on Family Resources Survey, , using TAXBEN and assumptions specified in the text. The previous Labour government had set itself targets for relative child poverty to fall by a quarter of its level by , and by a half by Child poverty in is forecast to be considerably higher than the target level, falling by just over a quarter in 12 years, rather than by a half. Between and , absolute poverty is forecast to fall slightly, and relative poverty to rise slightly as real earnings return to positive growth. Between and , all measures of poverty rise or remain broadly unchanged. These central forecasts imply that relative child poverty will rise from its current level of 20% to reach 24% in , and that child poverty against the fixed poverty line will reach 23% in These are both considerably higher than the targets specified in the Child Poverty Act (of 10% and 5% respectively), and the rate of relative child poverty forecast for would be the highest since

10 Extended summary The impact of the current government s reforms on poverty This Commentary estimates the impact on poverty of the coalition government s reforms by comparing these central forecasts -- which account for government policy towards personal tax and state benefits announced as of Summer and a forecast that assumes that none of the reforms announced by the current government is introduced. These reforms include Universal Credit and other changes announced but not yet implemented. The comparison suggests that the impact of changes to personal tax and benefit policy announced by this coalition government is to increase relative child poverty by 200,000 in both and , and to increase relative poverty for working-age adults by 200,000 in and 400,000 in The reforms are forecast to increase absolute child poverty by 200,000 in and 300,000 in , and to increase absolute working-age poverty by 300,000 in and 700,000 in The most significant reform to state benefits proposed by the government is to replace all means-tested benefits and tax credits for those of working age with a single, integrated benefit to be known as Universal Credit. Considered in isolation, Universal Credit should reduce relative poverty significantly (by 450,000 children and 600,000 working-age adults), but this reduction is more than offset by the poverty-increasing impact of the government s other changes to personal taxes and state benefits. The most important of these other changes for poverty in is that benefits, including the Local Housing Allowance from April 2013, will now be indexed in line with the consumer price index (CPI) measure of inflation, rather than one derived from the retail price index (RPI). Sensitivities Alternative scenarios in which employment rates rise or benefit non-take-up rates fall relative to the central scenario -- perhaps due to Universal Credit -- show rates of poverty in which are little different from the central forecast. Variants where future earnings growth favours high or low earners also result in little difference in poverty rates, in part because of the imperfect match between individuals who are not working, or individuals who have low hourly wages, and individuals in poverty. Implications for policy This Commentary forecasts what might happen to poverty under current government policies and shows that governments cannot rely on higher employment and earnings to reduce relative measures of poverty. The results therefore suggest that there can be almost no chance of eradicating child poverty -- as defined in the Child Poverty Act -- on current government policy. Although this project did not assess what policies would be required in order for child poverty to be eradicated, it is impossible to see how relative child poverty could fall by so much in the next 10 years without changes to the labour market and welfare policy, and an increase in the amount of redistribution performed by the tax and benefit system, both to an extent neverbefore seen in the UK. IFS researchers have always argued that the targets set in the Child Poverty Act were extremely challenging, and the findings here confirm that view. It now seems almost incredible that the targets could be met, yet the government confirmed its commitment to them earlier this year, in its first Child Poverty Strategy, and remains legally-bound to hit them. We suggest the government consider whether it would be more productive to set itself realistic targets for child poverty and provide concrete suggestions for how they might be hit -- ideally, verified with a quantitative modelling exercise such as this one. 3

11 Child and working-age poverty from 2010 to 2020 On a technical note, the government currently prefers to use the retail price index to adjust the absolute poverty line for changes in prices over time, but it now uses the consumer price index to adjust the generosity of most benefits and tax credits. It is well known that the CPI usually gives a lower estimate of the rate of inflation than the RPI, and this is one reason why absolute poverty is forecast to rise even between and Researchers continue to debate whether the RPI or the CPI gives a better measure of poorer households inflation experiences, but as the government apparently believes that the CPI is superior, given its policy on uprating benefits, it should consider indexing the absolute poverty line in line with the CPI as well. 4

12 1. Introduction This Commentary provides projections of income poverty among children and working-age adults in the UK under current tax and benefit policies. We also estimate the direct impact on poverty of tax and benefit reforms announced by the coalition government. Joyce (2011) forecast poverty through to , and we now extend his work to provide projections for each year between and , and for , incorporating what is known, at the time of writing, about Universal Credit. We produce these projections using data on household incomes from the Family Resources Survey (FRS), the large-scale household survey from which official poverty statistics are derived; the IFS static tax and benefit microsimulation model, TAXBEN; 1 and projections of demographic and macroeconomic variables. There are several reasons why microsimulation techniques are well suited to poverty modelling. Such models allow for explicit simulation of the entire income distribution, which enables precise quantification of the effect on relative poverty of rises in the relative poverty line caused by rises in the median income; and such models enable us to estimate precisely the impact of direct tax and benefit changes (including often complicated interactions between them) on household incomes. This Commentary follows Brewer, Browne and Sutherland (2006), Brewer, Browne, Joyce and Sutherland (2009) and Brewer and Joyce (2010) in applying such techniques to forecast poverty in the UK. Unlike those papers, here we project poverty among the working-age population as well as among children. 2 We use two definitions of income poverty, both of which are set out in the Child Poverty Act An individual is in relative income poverty in a particular year if their household income is less than 60% of the national median household income in that year. An individual is in absolute income poverty in a particular year if their household income in that year is less than 60% of the national median (in real terms). 3 Household incomes are measured net of taxes and inclusive of benefits and tax credits, and are equivalised using the modified OECD equivalence scale. Incomes are measured both before and after housing costs have been deducted (though note that the Child Poverty Act refers only to incomes measured before housing costs have been deducted). Full details of the methodology we use to produce our forecasts are given in Appendix A. We proceed as follows. Chapter 2 gives a brief policy background. Chapter 3 presents the results of the modelling exercise, showing projections of poverty under current policies (Sections ) and without the reforms announced by the coalition government (Section 3.4). In Chapter 4, we quantify the sensitivity of our results to employment and earnings assumptions. Chapter 5 concludes. 1 For a description of TAXBEN, see Giles and McCrae (1995). The basic structure of the model has not changed since then. 2 Our model also simulates the income of pensioners, but does so in a relatively crude way, ignoring the important cohort effects whereby new pensioners retire with higher amounts of wealth than their predecessors. For an example of a report that does attempt to forecast pensioner poverty, see Brewer et al. (2007). 3 In recent years, the absolute poverty line has been defined as 60% of the national median, but the 2010 Child Poverty Act says that the absolute poverty line will be rebased in The absolute poverty line is uprated in line with the retail price index (excluding council tax) and with the Rossi index for before-housing-costs and after-housingcosts incomes respectively. 5

13 2. Child poverty: past performance and policy context for the future This chapter provides an overview of trends in child poverty since the late 1990s (Section 2.1) and briefly discusses the policy context for monitoring poverty over the forthcoming decade (Section 2.2). It draws heavily upon work co-authored by the authors of this paper (Brewer, Browne, Joyce and Sibieta, 2010; Jin, Joyce, Phillips and Sibieta, 2011). 2.1 Child poverty under the Labour government In March 1999, the Labour government announced an unprecedented target to eradicate child poverty by , along with interim child poverty targets for and The first interim target was for child poverty in Britain in to be one-quarter lower than its level, using a poverty line of 60% of median household income; this was narrowly missed. The second interim target was for child poverty in the UK in to be one-half its level. Progress towards the target was assessed using three definitions of poverty: a relative low income indicator, an absolute low income indicator and a combined relative low income and material deprivation indicator. The relative low income indicator used a poverty line of 60% of median household before-housing-costs 4 (BHC) income; the absolute low income indicator used a poverty line of 60% of the BHC median (in real terms); and the combined relative low income and material deprivation indicator classified children as being in poverty if their household BHC income is below 70% of the median and they are materially deprived (as determined by answers to a series of questions about what their family can afford to do). Table 2.1 reviews progress up to on these measures. It shows consistent declines in child poverty across all three measures between and , but a less straightforward story thereafter. In fact, the reduction in child poverty between and is by far the largest and most sustained since the comparable series began in 1961 (see Brewer et al. (2010) for more on this). More insights on the difference between the period before and after are given by Figure 2.1 (from Brewer et al. (2010)), which illustrates the real average annual growth in household incomes across the children s income distribution between and , and compares this with the corresponding numbers from previous decades. Children are ordered from lowest to highest on the basis of household income and split into 100 equally sized groups, called percentile groups. The graph shows how average household income at the top of each percentile group has grown in real terms for each 10-year period between 1968 and In making these comparisons, it is important to realise that these periods cover different stages of various economic cycles, and income growth rates are very sensitive to this. Having noted this, Figure 2.1 shows that, between and , the strongest growth in household income was 4 Incomes can be measured before or after housing costs have been deducted (BHC or AHC). Because the government s child poverty targets related to BHC income, we focus on that in this Commentary, but we also provide figures for incomes measured AHC. 5 For consistency, we use as the starting point throughout this Commentary, as that is the baseline against which the child poverty targets are defined, but the downward trend in child poverty actually started between and

14 Child poverty: past performance and policy context for the future Table 2.1. Progress towards halving child poverty in the UK by Relative poverty, UK, modified OECD (BHC) Absolute poverty, UK, modified OECD (BHC) Material deprivation and relative low income % Million % Million % Million Change since Target for n/a 1.7 Notes: Reported changes may not equal the differences between the corresponding numbers due to rounding. The data are for the UK and incomes are equivalised using the modified OECD equivalence scale. For the purposes of the child poverty target in , DWP has had to estimate the level of relative child poverty in the UK in (Northern Ireland was first included in the official HBAI series in ). For the combined indicator of material deprivation and relative low income, a threshold of 70% of median income is used to determine a relative low income. Sources: Authors calculations based on Family Resources Survey, various years; Department for Work and Pensions (2011). UK poverty levels for years to draw on DWP s imputed estimates of poverty levels in Northern Ireland over this period. found in the lower half of the children s income distribution, approximately between the 10 th and 40 th percentile points. The pattern of household income growth amongst children was inequalityreducing (i.e. income growth was higher at lower points in the distribution) across a large majority of the distribution. This contrasts with previous decades (and most starkly with the decade between 1978 and 1988), when the pattern of household income growth amongst children tended to be inequality-increasing. Real household income growth amongst children over the last decade has been higher at virtually all points of the distribution than it was over the decades after 1968 and Relative to the period between 1978 and 1988, growth has been stronger across most of the bottom half of the distribution, but less strong in the top half. Brewer et al. (2010) explore the drivers of the fall in child poverty over the past decade (and some of the reasons why child poverty did not fall as much as the government of the day would have liked). They find that direct tax and benefit reforms were very important in explaining the large overall reduction in child poverty since , the striking slowdown in progress towards the child poverty targets between and , and some of the variation in child poverty trends between different groups of children. They also find that the performance of parents in the labour market was important too: between regions, parental employment and child poverty trends are closely related; the overall reduction in child poverty since has 7

15 Child and working-age poverty from 2010 to 2020 Figure 2.1. The distribution of household income growth for children over 10-year periods between 1968 and (Great Britain) 6.0% Average annual real income growth 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% % -2.0% Percentile point of the children's income distribution Notes: Incomes have been measured before housing costs have been deducted. 1968, 1978 and 1988 refer to calendar years; 1998 and 2008 refer to financial years. Source: Brewer et al. (2010) using data from Family Expenditure Survey, 1968, 1978 and 1988, and from Family Resources Survey, and been helped by higher lone-parent employment rates; and the overall rise in child poverty since has been most concentrated on children of one-earner couples, whose real earnings have fallen. Finally, they conclude that some of the child-poverty-reducing impact of tax and benefit changes enacted by the then government acted simply to stop a rise in child poverty that would otherwise have occurred as real earnings grew over the period, which increased median income and thus the relative poverty line. 2.2 Child poverty over the next decade The Child Poverty Act 2010, passed with cross-party support, makes the target to eradicate child poverty by 2020 a legal requirement. The Act sets four UK-wide targets that define the eradication of child poverty: a rate of relative income poverty below 10%; less than 5% of children suffering both material deprivation and a relative low income (using a low-income threshold set at 70% of the median); less than 5% of children living in absolute poverty, defined as income less than 60% of the median income; and a rate of persistent poverty less than a yet-to-be-specified target. The most-watched measure is likely to be the relative income poverty indicator. The Act states that a rate of relative income poverty of 10% would be consistent with the eradication of child poverty, with the rationale that it would be a level 8

16 Child poverty: past performance and policy context for the future comparable to the lowest in Europe (it would also be 3 percentage points lower than that achieved in the UK at any time since at least 1961). 6 In previous poverty and inequality reports, IFS researchers have argued that a focus on incomebased measures may skew the policy response towards reforms that have immediate and predictable impacts on household incomes such as tax and benefit changes rather than those that most cost-effectively improve children s quality of life or reduce the risk of intergenerational transmission of poverty such as improvements to education. 7 To some extent, the coalition government s Child Poverty Strategy, published on 5 April 2011, recognises this problem. 8 It states that poverty is about far more than income and expresses concern that a focus on the symptoms as opposed to causes of poverty led to poor policymaking and poor outcomes. Hence, as well as a new measure of income-based severe poverty, the strategy sets out a number of ancillary indicators that will be tracked to assess whether the government is on course to eradicate child poverty. These indicators are grouped into broad themes, and progress on improving them (and on meeting the existing income-based targets) is linked to a number of specific government policies (see Jin et al. (2011) for more discussion). But it is not clear whether the particular policies to be implemented will materially reduce child poverty and improve children s life chances. And, although a focus on early educational intervention is welcome, it is highly unlikely that successful interventions could have an impact on the level of income-based child poverty as close as nine years away. 6 Reducing income poverty amongst children to zero is infeasible for at least three reasons: incomes are volatile in the short run, so there will always be some people with very low incomes at any point in time, e.g. due to self-employment losses or transition between jobs (clearly this applies less to the persistent poverty target); survey data are always subject to misreporting and the Family Resources Survey under-records benefit and tax credit receipt (see appendix C of Brewer, Muriel, Phillips and Sibieta (2008)); and the take-up rate for means-tested benefits and tax credits will never be 100%. 7 See, for example, box 4.2 of Brewer, Muriel, Phillips and Sibieta (2009). 8 HM Government,

17 3. Results In this chapter, we first outline our poverty projections under current policies (Sections ) and then take a look at the impact of tax and benefit reforms announced by the coalition government on these projections (Section 3.4). When presenting poverty levels, we round to the nearest 100,000. When comparing poverty across years, or under different tax and benefit systems, we compare unrounded poverty levels and report the differences rounded to the nearest 100,000. Therefore, due to rounding, differences between rounded poverty levels shown in the tables in this chapter may not equal the differences reported in the text. This follows the convention used by the Department for Work and Pensions (DWP) in the official Households Below Average Income (HBAI) series. All years are financial years, because the Family Resources Survey (the survey of household incomes on which official poverty statistics are based) covers financial years; thus 2009 refers to etc. 3.1 The path of poverty to 2013 under current policies Tables 3.1 and 3.2 show our projections to 2013 of relative and absolute income poverty respectively using the 60% of median income poverty line (both before and after housing costs (BHC and AHC)), under current policies. 9 We show projected poverty rates for four subgroups: children, working-age adults, working-age parents and working-age adults without dependent children. We split working-age adults into those with and those without dependent children because recent poverty trends have differed between these groups (and, indeed, the same is true under our projections). Table 3.1 also gives our projections of real annual growth in median household incomes. The tables show the following: We estimate that real median household incomes have fallen significantly between 2009 and By reducing the relative poverty line, this reduces relative poverty, other things being equal. We expect that relative child poverty will have fallen by a further 100,000 in 2010 on top of the 200,000 fall seen in 2009 for incomes measured BHC and remain at this level in But relative poverty among working-age adults without dependent children is expected to rise slightly (by about 200,000 with incomes measured BHC) between 2009 and 2011, despite the fall in the relative poverty line. Absolute poverty is forecast to have remained relatively stable among families with dependent children, but to have increased among working-age adults without dependent children (by about 300,000 or 1 percentage point BHC), between 2008 and The fact that absolute poverty among families with dependent children is not forecast to have risen as the UK was emerging from recession is likely to be (at least partly) due to the previous government s above-indexation Child Tax Credit increases over this period. 10 In 2011, however, absolute child poverty is forecast to rise by 300, Results using the 50% of median income poverty line and the 70% of median income poverty line are reported in Appendix D. The trends in these poverty rates are broadly equivalent to those reported here. 10 See Brewer, Browne, Joyce and Sutherland (2009) and Brewer, Browne, Joyce and Sibieta (2010). 10

18 Table 3.1. Projections of relative income poverty in the UK under current policies Children Working-age adults Working-age parents Working-age adults without children Millions % Millions % Millions % Millions % Real annual median income growth (%) Incomes measured before deducting housing costs BHC 2008 (actual) (actual) Incomes measured after deducting housing costs AHC 2008 (actual) (actual) Notes: Poverty line is 60% of median income. Years refer to financial years. Source: Authors calculations based on Family Resources Survey, , using TAXBEN and assumptions specified in the text. Actual figures from Department for Work and Pensions (2011). 11

19 Table 3.2. Projections of absolute income poverty in the UK under current policies Children Working-age adults Working-age parents Working-age adults without children Millions % Millions % Millions % Millions % Incomes measured before deducting housing costs 2008 (actual) (actual) Incomes measured after deducting housing costs 2008 (actual) (actual) Notes: Poverty line is 60% of the real median income (hence, relative and absolute poverty in are identical). Years refer to financial years. Source: Authors calculations based on Family Resources Survey, , using TAXBEN and assumptions specified in the text. Actual figures from Department for Work and Pensions (2011). 12

20 Results In 2012, real median income (and hence the relative poverty line) is forecast to remain broadly static; relative child poverty and absolute child poverty are forecast to rise by about 100,000; and relative and absolute poverty among working-age adults without dependent children are forecast to rise by about 100,000 (BHC). In 2013, real median income is forecast to continue to stagnate and both relative and absolute poverty are forecast to rise. With incomes measured BHC, relative poverty is forecast to rise by about 200,000 children and 100,000 working-age adults without dependent children, and absolute poverty is forecast to rise by about 200,000 children and 100,000 working-age adults without dependent children. 3.2 The effect of Universal Credit in 2014 and 2015 Tables give our projections for relative and absolute poverty in 2014 and To simulate poverty in 2014 and beyond, we must model the impact of Universal Credit on household income. 11 It is planned that Universal Credit will be phased in between 2014 and 2017, and that there will be a form of transitional protection so that no household is worse off in cash terms at the point it is transferred to Universal Credit. In Appendix A, we outline how we have accounted for the phased introduction and the transitional protection when modelling Universal Credit. To isolate the impact of Universal Credit, we also show the corresponding projections under a hypothetical scenario in which no one receives Universal Credit (i.e. as if the government had introduced all of its tax and benefit reforms other than Universal Credit) and one in which all working-age families are immediately transferred to Universal Credit without any transitional protection (the latter would be a scenario in which the government took a big bang approach to implementing Universal Credit and there were losers at the point of transition). The key results are as follows: Under our central scenario, median income before housing costs will start to grow from 2014, but will still be below its 2010 level in Median income measured after housing costs will increase more quickly, however, exceeding its 2010 level by Relative poverty will continue to increase slowly between 2013 and 2015, by 100,000 children and 200,000 working-age adults without children. Absolute poverty rates will fall slightly between 2013 and 2015 as incomes start to grow under our central scenario. If the government did not introduce Universal Credit, relative child poverty would increase by a further 300,000 children and 100,000 working-age adults without children between 2013 and This does not, however, give us the overall impact of introducing Universal Credit on poverty, as in 2015 not all families will have been transferred onto Universal Credit (this will not happen until 2018). 11 Although some claims of Universal Credit will begin from October 2013, it is extremely likely that the effect of Universal Credit on poverty will be very close to zero in 2013, mainly because it will only apply to new claimants of outof-work benefits (not tax credits) until April 2014, and those with no earnings and receiving out-of-work benefits will not be any better off under Universal Credit than under the present system. 13

21 Table 3.3. Projections of relative income poverty in the UK under current policies: incomes measured before deducting housing costs Children Working-age adults Working-age parents Working-age adults without children Millions % Millions % Millions % Millions % Real annual median income growth (%) Central scenario Without Universal Credit Universal Credit fully in place Notes: Poverty line is 60% of median income. Years refer to financial years. Source: Authors calculations based on Family Resources Survey, , using TAXBEN and assumptions specified in the text. 14

22 Table 3.4. Projections of relative income poverty in the UK under current policies: incomes measured after deducting housing costs Children Working-age adults Working-age parents Working-age adults without children Millions % Millions % Millions % Millions % Real annual median income growth (%) Central scenario Without Universal Credit Universal Credit fully in place Notes: Poverty line is 60% of median income. Years refer to financial years. Source: Authors calculations based on Family Resources Survey, , using TAXBEN and assumptions specified in the text. 15

23 Table 3.5. Projections of absolute income poverty in the UK under current policies: incomes measured before deducting housing costs Children Working-age adults Working-age parents Working-age adults without children Millions % Millions % Millions % Millions % Central scenario Without Universal Credit Universal Credit fully in place Notes: Poverty line is 60% of the real median income. Years refer to financial years. Source: Authors calculations based on Family Resources Survey, , using TAXBEN and assumptions specified in the text. 16

24 Table 3.6. Projections of absolute income poverty in the UK under current policies: incomes measured after deducting housing costs Children Working-age adults Working-age parents Working-age adults without children Millions % Millions % Millions % Millions % Central scenario Without Universal Credit Universal Credit fully in place Notes: Poverty line is 60% of the real median income. Years refer to financial years. Source: Authors calculations based on Family Resources Survey, , using TAXBEN and assumptions specified in the text. 17

25 Child and working-age poverty from 2010 to 2020 By comparing the scenario in which Universal Credit is not introduced with the scenario in which Universal Credit is fully in place in 2014, we can see that the impact of introducing Universal Credit without any transitional protection or phase-in period in 2014 would be to lower relative child poverty by 450,000 and relative poverty among working-age adults by 600,000. DWP s analysis of the effect of fully introducing Universal Credit in 2014 without any transitional protection or phase-in period produced a smaller estimate of the effect of the reform on child poverty, though our estimates are the same for working-age adults Projections of poverty in 2020 under different scenarios Our main assumptions about the evolution of macroeconomic variables up to 2020 are set out in Appendix A. Clearly, there are many uncertainties when projecting so far into the future, so we examine the sensitivity of our projections to our assumptions about employment and earnings and we examine the effect of higher take-up of Universal Credit. Further sensitivity analysis for our 2015 projections can be found in Appendix B. Tables 3.7 to 3.10 show poverty projections under each of these scenarios. The key results are as follows: In our baseline scenario, relative poverty is forecast to continue to increase between 2015 and 2020, by 300,000 children and 1 million working-age adults. This increase is mainly due to benefit rates not keeping pace with growth in median income CPI-uprating of benefits means that they go up by 1.5 percentage points less than the RPI over this period and 2.5 percentage points less each year than gross earnings in our baseline scenario. This means that the difference in incomes between low-income households (who are more reliant on income from the state) and households around the median (who are more reliant on earnings) tends to increase over time, increasing relative poverty. However, the completion of the introduction of Universal Credit over this period limits the increase in poverty somewhat. Absolute poverty rates remain fairly constant between 2015 and 2020, despite earnings (and median income) rising in real terms. It is likely that this is again because the CPI-indexation of benefits lags behind the RPI-indexation of the absolute poverty line. Our projections are remarkably insensitive to changes in employment rates and take-up that might result from the introduction of Universal Credit. In theory, increased employment unambiguously reduces absolute poverty, but it might actually increase relative poverty, because it may raise median income and hence the relative poverty line. 13 Furthermore, starting paid work is sometimes not sufficient for a household to escape poverty (indeed, as Jin, Joyce, Phillips and Sibieta (2011) show, 56% of children currently in poverty have at least one working parent). Our baseline scenario incorporates a high level of take-up of Universal Credit to begin with, meaning that there is little scope for higher take-up to reduce poverty further. 12 See Department for Work and Pensions (2011). The reasons for this small discrepancy are not clear. We have received a considerable amount of advice from DWP officials on how best to model Universal Credit in our tax and benefit microsimulation model, but we have not been able to verify that our approach was identical to the one they took when producing estimates earlier this year. 13 Of course, a rise in employment concentrated amongst groups who experience high rates of poverty when out of work can lower relative poverty. 18

26 Table 3.7. Projections of relative income poverty in 2020 under different scenarios: incomes measured before deducting housing costs Children Working-age adults Working-age parents Working-age adults without children Millions % Millions % Millions % Millions % : Real average annual median income growth, 2015 to 2020 (%) Baseline High earnings growth ,000 fall in no. of workless households ,000 fall in no. of workless households ,000 fall in no. of workless households and ,000 fall in no. of two-earner households 500,000 fall in no. of workless households Non-take-up of Universal Credit halved Full take-up of Universal Credit Without Universal Credit Notes: Poverty line is 60% of median income. Years refer to financial years. Source: Authors calculations based on Family Resources Survey, , using TAXBEN and assumptions specified in the text. 19

27 Table 3.8. Projections of relative income poverty in the UK under current policies: incomes measured after deducting housing costs Children Working-age adults Working-age parents Working-age adults without children Millions % Millions % Millions % Millions % : Real average annual median income growth, 2015 to 2020 (%) Baseline High earnings growth ,000 fall in no. of workless households ,000 fall in no. of workless households ,000 fall in no. of workless households and ,000 fall in no. of two-earner households 500,000 fall in no. of workless households Non-take-up of Universal Credit halved Full take-up of Universal Credit Without Universal Credit Notes: Poverty line is 60% of median income. Years refer to financial years. Source: Authors calculations based on Family Resources Survey, , using TAXBEN and assumptions specified in the text. 20

28 Table 3.9. Projections of absolute income poverty in the UK under current policies: incomes measured before deducting housing costs Children Working-age adults Working-age parents Working-age adults without children Millions % Millions % Millions % Millions % : Baseline High earnings growth ,000 fall in no. of workless households ,000 fall in no. of workless households ,000 fall in no. of workless households and ,000 fall in no. of two-earner households 500,000 fall in no. of workless households Non-take-up of Universal Credit halved Full take-up of Universal Credit Without Universal Credit Notes: Poverty line is 60% of the real median income. Years refer to financial years. Source: Authors calculations based on Family Resources Survey, , using TAXBEN and assumptions specified in the text. 21

29 Table Projections of absolute income poverty in the UK under current policies: incomes measured after deducting housing costs Children Working-age adults Working-age parents Working-age adults without children Millions % Millions % Millions % Millions % : Baseline High earnings growth ,000 fall in no. of workless households ,000 fall in no. of workless households ,000 fall in no. of workless households and ,000 fall in no. of two-earner households 500,000 fall in no. of workless households Non-take-up of Universal Credit halved Full take-up of Universal Credit Without Universal Credit Notes: Poverty line is 60% of the real median income. Years refer to financial years. Source: Authors calculations based on Family Resources Survey, , using TAXBEN and assumptions specified in the text. 22

30 Results If the government did not introduce Universal Credit, poverty would increase by much more over the period from 2015 to Relative poverty would be higher by 450,000 children and 600,000 working-age adults if Universal Credit were not introduced. Thus we see that the long-run impact of Universal Credit is to reduce relative poverty by around 450,000 children and 600,000 working-age adults (which happens to be equal to the estimated impact of introducing Universal Credit in 2014 without any phase-in or transitional protection that we saw in the previous section). The Child Poverty Act 2010 commits current and future governments to reducing relative BHC income child poverty to 10%, and absolute BHC income child poverty to 5%, by Our results suggest that current policies will fall far short of this objective: we estimate that in 2020 relative child poverty will be at its highest rate since 1999 and absolute child poverty will be at its highest rate since Figure 3.1. Absolute and relative child poverty Child poverty rate 30% 25% 20% 15% 10% 5% 0% Relative: actual Relative: forecast Relative: 2020 target Absolute: actual Absolute: forecast Absolute: 2020 target Notes: Years up to 1992 are calendar years; thereafter, years refer to financial years. Incomes are measured before housing costs have been deducted (BHC) and are equivalised using the modified OECD equivalence scale. Figures before 2001 are for Great Britain; figures from 2002 onwards are for the whole United Kingdom (Northern Ireland was first included in the official HBAI series in ). Years between 2015 and 2020 are linear interpolations between figures for 2015 and Sources: Figures for 1980 to 2009 are from the Family Expenditure Survey ( ) and the Family Resources Survey ( ). Projections are authors calculations based on Family Resources Survey, , using TAXBEN and assumptions specified in the text. 3.4 The direct impact on poverty of the coalition government s tax and benefit reforms In this section, we repeat the simulations presented so far in this chapter, except that the assumed tax and benefit systems are those that would have been in place if the coalition government had simply implemented the plans for the tax and benefit system that it inherited from the previous government. By comparing the results of these simulations with those in the previous sections, we can quantify the direct impact of those reforms on poverty between 2010 and 2015 and then in It is very important to recognise what this exercise does and does not reveal. The tax and benefit systems that would have been in place if the coalition government had not made any reforms are 23

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